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Report: Bitcoin. Open, decentralized and growing.

The term Bitcoin (BTC) has become a buzzword. A buzzword most recently associated with the euro, pyramid schemes and a purposed solution to the current banking crisis and economic turmoil. But what exactly is “Bitcoin” and is it something one should be investing in?

The term Bitcoin (BTC) has become a buzzword. A buzzword most recently associated with the euro, pyramid schemes and a purposed solution to the current banking crisis and economic turmoil. But what exactly is “Bitcoin” and is it something one should be investing in?

What is Bitcoin:

Bitcoin is an open source, peer to peer, crypto-currency which relies on its users as the mint. Conceived by Satoshi Nakamoto and released in 2009 (0.1 alpha), Bitcoin employs a “proof of work” system which ensures security, legitimacy of transfer and generation and elementals double spending. Each user can have one or several Bitcoin addresses (similar to a bank account number) which are generated using an elliptic curve DSA. These addresses link to a digital wallet, stored on locally on the users machine or to an online wallet known as an ‘instawallet’. Users can, using these addresses, transfer any amount of Bitcoin they wish to and from any wallet. These wallets are encrypted using the (currently still secure) SHA-256 encryption algorithm and as with a physical wallet, if lost, its contents are lost with its.

Mining:

Bitcoins are generated by their users instead of a centralized mint or governing body. Blocks are mathematical problems generated by the Bitcoin network it and users willing to use their computer resources and electricity, known as miners, are rewarded with the Bitcoin that solving that block results in (initially 50 BTC per block). There are a finite number of Blocks that can ever possibly be created (in and around 21 million) and as the current number of blocks generated increases, so to does the difficulty of each Block with the number of coins per block decreasing to match.

Because of this in order to keep generating at the same rate consistently, miners must add more and more available resources to their mining efforts, hence the pyramid connotations with early adopters being rewarded more so than later ones. However those early adopters do not directly govern the profitability of those mining below them unlike traditional pyramid schemes. This accounts for inflation as well as keeping Moore’s law at bay.

Originally miners could find profitability in using their CPUs to mine for coin, but as the difficulty of the Blocks increased the only viable method of mining became the use of GPU’s. GPUs have a much higher Megahash/s throughput than CPU and are relatively inexpensive to procure. Now however, while there is still some viability in GPU mining (although it requires multiple high end, OpenCL capable GPUs) it has a large footprint, both physical and economical.

The big money today lies in task built FPGAs or Field Programmable Gate Arrays which exist for the sole purpose of solving Bitcoin Blocks. They provide a high return on dollar spent and watt used per Megahash/s produced.

The use of FPGA has even created an industry amongst users with specialist hardware skills who produce and sell their specialist devices to others in the Bitcoin community.

Due to the current difficulty (which is almost 210,000 times more than that of the first generated Block) miners tend to pool together to solve Blocks and share in the resulting coin generated. This is a much more consistent method of earning Bitcoin, however the payouts is significantly less.

As with solo mining the more resources put into the pool by a user, the greater his return. Usually miners in a pool direct their miner application at that pools web address and port number, specifying the name and password of their worker and watch the coin roll in.

A good example of this is http://mining.bitcoin.cz/ (which also support Namecoin, a Bitcoin alternative used for domain name registration)

The Market:

With the current collapse and impending fall through of the euro, more and more people are searching for alternatives which can act as some form of security net.

Investors in charge of monetary funds are now beginning to dabble in Bitcoin as a method of growing their pile and due to this new found interest and the disillusion in the eurozone, the value of the Bitcoin has risen sharply in recent times. Over the last 30 days a single Bitcoin (BTC) has jumped from just north of 3 dollars to over 6 dollars a piece.

While most Bitcoin users and market analysts alike view this as a good sign and one of recovery, many people are still very cautious of such a large spike in such a short period of time. It would not be the first time the bubble has burst after all.

To view the current market charts head over to BitcoinChats

The Risks:

In 2010 the Bitcoin weighed in at around 20 dollars a coin with some market analysts predicting that number rising to 100 or even 1000 dollars per coin.

A market crash was inevitable, one which even the dogs on the street could see coming.

The smart sold their amassed coin, but many who where caught up in the upward trend did not.

In June of that year the euro collapsed bringing the value of the Bitcoin right down with it.

It reached a market low of almost a single dollar per coin leaving the BTC community in disarray and a lot of miners seriously worried about their investments.

To add insult to injury one of the major Bitcoin exchanges Mt.Gox had an intruder access its servers using compromised moderator login credentials and transfer and sell almost 500,000 dollars worth of Bicoin overnight. This left the value of the Bitcoin at nearly zero. Thankfully Mt.Gox where able to reverse the transactions before it was too late, bringing the value of BTC back up to nearly its worth prior to the the attack. Trader confidence however was left irreparably damaged and many saw this as the death knell of the Bitcoin. Since those dark days the Bitcoin has seen growth. Not major growth, gradual, solid growth all the same.

Legality & public reception:

Due to its transfers being almost completely anonymous (almost being the key word there) the Bitcoin quickly became the medium of choice for those looking to trade weapons, drugs and other illicit goods on the net.

Those in government deeply worried by decentralized nature of BTC used this as a means to illegalize it.

However to ensure this did not come to pass the developers behind the Bitcoin client have worked closely with the various branches of law enforcement across the world to ensure the systems is not abused by those looking to commit nefarious activities and that Bitcoin is reachable by the long arm of the law.

The public on the other hand have had a very mixed reaction to this so called crypto-currency.

As more begin to take the currency as serious and viable alternative to well established, traditional ones such as the euro and the dollar the legitimacy of the Bitcoin is further compounded.

But there are still those who deem Bitcoin to be a ponzi scheme and at essence a total crock, with no real value proposition (In the way you would use money to gain services in place of a barter system). However, when any Bitcoin advocate draws parallels between Bitcoin and any existing , mainstream currency it becomes painfully obvious that the main reason for their hostility is not the legitimacy of the model involved but how much it makes them question their own blind faith in the current methods of trading (be that credit, euro, pound or dollar) that they use.

Also, more and more small industries such as resturants and online foundations alike are starting to accept Bitcoin as a method of donation and as a recognized currency for online transactions.

While i wouldn't advice putting all your eggs in the BTC basket, i would suggest you at least look into giving Bitcoin a try as a method of payment if you are an interested party in industry.

Alternatives:

While many Bitcoin alternatives exist (such as Namecoin, which i mentioned above) the one to watch in my opinion is the Litecoin(LTC).

Litcoin is a BTC clone which is essentially silver to Bitcoin’s gold. Its has a current market value which is a fraction of that of Bitcoin’s, but it is also at very early stage in its lifecycle. This means that its difficulty is significantly lower than that of Bitcoin and due to its GPU resistant nature it can be mined on the CPU in parallel with Bitcoin without either mining process being affected.

Litecoin uses Scrypt as a proof-of-work scheme (similar to Bitcoin). Scrypt adds memory-intensive algorithms to reduce the efficiency of GPUs down to the level of CPUs. This is good in the short term, but is almost certainly harmful if Litecoin were to gain wide-scale adoption. While the current market value is low it may one day be half of Bitcoin’s current value or higher but as with Bitcoin early adopters are rewarded, hence now is the time to get mining Litecoin (LTC) as its value may increase dramatically along side its older brother in the coming year.

Other crypto-currencies include SolidCoin, LiquidCoin and the aforementioned, Name-coin.

The Future:

While the Bitcoin may or may not be the one world currency in 10 years time that many hope it will. its lightly to pave the way for future e-currencies which employ a similar methodology. Either way, Bitcoin is one to watch in 2012.